23 Jun Lowering an estate’s value before death

Q. My neighbor’s son was seriously injured in an accident and has been on life support for several years. His condition is worsening and they’re thinking of removing the life support. The son received a large settlement from the accident and it’s sitting in a checking account. What can the family do to minimize taxes when the money is left to his family after he dies?
— Trying to help

A. The decision to remove a family member from life support is emotional, traumatic and heart wrenching. We’re sorry to hear of this.

The scenario you described, however, provides a rare opportunity to engage in “death bed” planning that could help minimize estate taxes, said Richard Miller, an attorney and chair of the elder law department at Mandelbaum Salsburg in Roseland.

Miller said estates in excess of $5.49 million are subject to federal estate tax at a 40 percent rate in 2017.

But it’s possible to use gifting to lower one’s estate.

Individuals are permitted to make annual gifts of $14,000 per person, Miller said.

“If the son’s assets exceed $5.49 million, the estate can be reduced by making $14,000 gifts to as many family members as possible prior to his death,” Miller said. “If $14,000 gifts are made to ten people, an estate tax savings of $56,000 can be achieved.”

Gifts in excess of $14,000 can be made, he said, but will be applied against and reduce the $5.49 million exemption amount.

Then for New Jersey, estates in excess of $2 million are subject to New Jersey estate tax in 2017. The tax is scheduled to be eliminated in 2018.

Unlike the federal system, there is no limitation on annual gifts in New Jersey, Miller said, so as a result, an individual can transfer an unlimited amount of assets immediately before death to reduce the estate tax.

“Likewise, as insensitive as it may seem, the timing of one’s death — and when to remove life support — may have a significant impact on the estate tax due,” Miller said. “For example, if an individual dies in 2017 with an estate of $5 million, the New Jersey estate tax would be $292,000. If the individual dies in 2018, there would be zero tax under the current law.”

Miller said gifts can be carried out by a power of attorney or guardian if the son is unable to make the gifts himself.

“It is important to note, however, that the power of attorney document must specifically authorize the agent to make gifts,” he said. “Likewise, court approval is required to authorize a guardian to make gifts.”

To remove the assets from one’s estate, the gifts must be completed — i.e. received and deposited by the recipient — prior to the donor’s death, Miller said.

Also keep in mind that New Jersey is one of the few states that also imposes an inheritance tax.

“The inheritance tax is not based on the size of the estate, but on who receives the estate,” he said. “There is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child — Class “A” beneficiaries. Since the assets in this case are likely to pass to parents, no inheritance tax would be due.”

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This post was first published in June 2017.